Market won't fall much
Does the dying out excitement indicate that Indian equities might be in for more pain? Not really, says Alchemy Capital Management's director and CIO Hiren Ved. Though he doesn't see a major fall from current levels, the expects it to stay in a range on rising inflation concerns.
"The market still has to deal with a few headwinds high oil prices and rising interest rate cycle this is not going to be very good for equity valuations at least in the near term," he says. However, these won't dramatically impact the market because people are already underweight and aware of some of these risks. "There can be a plus or minus 10% on either side at this point in time unless either things get significantly worse," he adds.
A: We are going to be in a range. The market will still have to deal with couple of headwinds. Oil prices continue to remain high and we are still in a rising interest rate cycle. It is n Fitflop Oasis Danmark ot going to be good for equity valuations at least in the near term. However, the expectations are low and a lot of people are sitting on the sidelines. I don t think anybody is overweight equities at this point in time.
Although some of these risks lay out, the impact on the market may not be that dramatic because people are already underweight and are aware of some of these risks that the market is facing. There is a plus or minus 10% on either side at this point in time, unless either things get significantly worse, for instance if oil prices go on to like USD 130 140, we will have a significant downside from here as well.
Q: What is the takeaway from earnings season? How much did earnings contribute to either the up or downside risk for the market?
A: The earnings season was okay though not great. Some large cap companies disappointed and there were a few shocks like State Bank of India and Infosys, which had a tepid guidance and ONGC also missed luster. Some of the large cap companies with a significant weight in the index have not delivered or over delivered. However, overall if you look at for the full year earnings for FY11, it s not had a very dramatic impact because the 3 quarters were already good in the bag and we have also seen the markets react to that. Now at about 14.5 15 times 1 year forward, it is imputing an earnings growth of about 18% to 19%, even if you think that there is a little bit downside to the earnings.
If earnings don t grow by 18% to 19% and grow by 14% to 15%, the market could probably again trade at 14 times 1 year forward, on the lower 15% growth in earnings, you could see levels back to the February lows, which means the Nifty at above 5178 5200. It is not impossible to see those levels; however, we would not go down beyond those levels unless as the macro aspects get even worse from where we are today.
Q: What about the influential sectors, do you think some of them have bottomed out? Some of the big private sector banks, big infrastructure names like L , do you see them violating February lows or retesting them or do you think some of them have started or have actually bottomed out?
A: Clearly, in the infra space prices are not reflecting any optimism even going forward. I think more or less they would have bottomed out. Whether they would go up or not, it would depend on whether the policy environment becomes favorable or execution improves, order intake improves. For example, the expectations f Fitflops Herre sandaler Trakk II rom L were low, they had a reasonable quarter and the stock went up by 10%.
If things move forward, since everybody is underweight in that sector, you could see some movements that could happen. We need the reforms that we have been talking about for a long period of time and have not happened. Now that the assembly elections are out of the way, if some of things like the land acquisition bill, talks on FDI starting rolling, some of these sectors that have underperformed for a long period of time could move up.
Q: What are your expectations from the two major events in June the EGoM meeting on June 9 and RBI policy on June 16? How much of a market moving impact could these have?
A: RBI has already hiked 50 basis points, maybe 25 basis points is something that the market is expecting. So, RBI policy may not be such a big market mover. Everybody is expecting 50 75 basis points hike now. The real surprise would come if nothing really changes the June policy. If RBI says I have increased it by 50 basis points, the data that we have seen post that has been softer, in terms of GDP growth in Q4, let me wait this time and see what the impact of this 50 basis points is going to be, then the market will be surprised positively. However, at this point in time the markets are essentially is saying that there will be another 25 basis points hike in the June policy.
Q: How do you translate it into your approach for the banks? Do you think the worst is in the system over the price now?
A: I think that if one has to play for the upside in the market, one has to start positioning oneself slowly and steadily in the interest rates sensitive sectors, since investors have gone underweight. If you think the markets already discounted a 50 75 basis points hike, the impact hence will be lesser on the interest rates sensitive sectors. If there is any upside, it is going to be in the interest rates sensitive sectors like autos and banks. Over the next 2 quarters, people should position themselves if they want to play the upside in the market.
Q: How do you approach the FMCG cluster now?
A: The valuations of sector are not cheap, but it is a very defensive sector to play in this kind of a macro environment. There is no debt on the books of these companies. Inflation helps these companies because they have reasonable pricing power and most of them have been able to pass on higher cost increases by taking price hikes. If there is a feeling that the commodity cycle is also peaked out then these companies could continue to deliver strong earnings, because they have taken price hikes. If cost pressures abet, profits will continue to be very strong. I would continue to remain overweight on the FMCG sector.
Q: How do you approach the auto space? Where does auto fit in, in your rate sensitive case?
A: We have seen margin pressure in auto companies come through in the fourth quarter results and we are also seeing that these stocks have corrected from their highs. However, it is an interesting space because in many ways this is like a proxy consumption play and also the c ommercial vehicles are a proxy infrastructure play. Therefore, I would look at positioning positively on these sectors over the next one or two quarters. They will bottom out and once interest rates peak out, these stocks can rally.
Q: How would you want to approach these two follow on offers ONGC and BHEL?
A: The valuation seems reasonable but we need clarity on ONGC. There has been a lot of flip flop which has happened in terms of subsidy sharing by upstream companies, which unnerves investors when they invest in oil companies in follow on public offers (FPOs).
As far as BHEL is concerned, it depends on the valuations. It is a high quality company though if some of the problems hampering the power sector are solved; it would be a very good play. I would prefer BHEL more to ONGC in the follow on offer.